Toei Animation Co., Ltd., founded in 1956, is a Japan-based company primarily engaged in the film and animation production business and undertaking distribution activities. Its core operations involve planning and producing animations for theatre and television, a licensing business engaged in the commercialisation license of productions, and a product sale business comprised of the development and sale of character products.

Segment-wise Film business contributed 39% of the sales mix in 9MFY25; Licensing, 48%; Sales of Goods, 10%; and others, 3%. The current employee count for Toei Animation stands at 911 employees.

Well-positioned to leverage the opportunities

Toei Animation anticipates the global animation market size to reach JPY8.6tn in CY2030 from JPY5.7tn in CY2022. This presents a compelling growth potential for the Japanese anime industry to expand its business. Accordingly, Toei Animation plans to leverage the opportunity and expand in global markets through export-oriented strategies like international sales of leading library titles; and Hollywood-style business such as acquisition of a global distribution network. Additionally, the company plans for additional local production for local consumption.

Toei Animation has progressed well towards its FY25 earnings estimates, driven by solid performances of licensing and sales of streaming rights. The group anticipates net sales to be at JPY90bn in FY25, and it has already achieved an 80.8% progress rate in 9MFY25. The company has made further progress in operating profit performance, achieving 86.6% of the target of JPY27bn. Net profit achieved 86.7% progress against the forecast of JPY19.5bn for the full year. Toei Animation plans to pay a dividend of JPY31 per share in FY25.

Fundamentals aiding rising cash reserves

Toei Animation has demonstrated business resilience over the period FY19-24, registering a CAGR of 9.7% in topline to reach JPY88.6bn. Operating income grew at a CAGR of 8.2% to JPY23.4bn in FY24, impacted by a margin contraction of 191 bps to reach 26.4%. Net income performance fared better, demonstrating a CAGR of 10.6% to JPY18.8bn, which consequently boosted cash inflow from operations. This helped in strengthening the cash reserves which reflected at JPY79bn as of FY24 end, compared to JPY34.5bn as of FY19 end.

On the other hand, the company’s local peer, SEGA Sammy, witnessed a revenue CAGR of 7.1% during the same period. Operating income significantly outperformed Toei Animation’s performance, growing at a CAGR of 34% to JPY56.8bn in FY24.

Valuation trending at a premium

Over the past 12 months, the company's stock has delivered muted returns of negative 1.5%. In comparison, its local peer, SEGA, delivered a strong return of 53.3%. Additionally, the company paid an annual dividend of JPY31 in FY24, resulting in a dividend yield of 1%, which is lower than SEGA’s 2.5% yield.

Toei Animation is currently trading at a P/E ratio of 32.4x, based on the FY25 estimated EPS of JPY105.3, which is higher than its 10-year historical average of 23.7x and its local peer SEGA, at 15x. Similarly, on an EV/EBITDA basis, the company is currently trading at 20.8x, based on the FY25 estimated EBITDA of JPY29bn, which is higher than its 10-year historical average of 13.5x and its local peer SEGA, at 9x.

Toei Animation is covered by a total of seven analysts, with three recommending a ‘Buy’ rating for an average target price of JPY3,510. This indicates the target is close to the current price, implying limited upside potential. However, any correction in the near term should provide a decent opportunity for investors to evaluate the stock.

The analysts expect an encouraging outlook for the company, demonstrating a CAGR of 7% in net sales over the period FY24-FY27, reaching JPY109.1bn. Additionally, analysts estimate an EBITDA CAGR of 10%, reaching JPY32.3bn with margins of 30% in FY27. Further, net income is expected to grow at a CAGR of 11% during the forecasted period to JPY25.3bn.

Overall, the company appears to be on track to achieve its forecast targets, aided by decent business momentum of licensing and sales of streaming rights, a robust increase in operating profit and a positive long-term fundamental trajectory. However, the company is prone to a few risks including stiff competition from peers including Studio Ghibli and Dreamworks which could impact the market share of the company. Changes to copyright laws and intellectual property regulations could adversely impact the operations overall, in different markets. Further, Toei Animation is also prone to volatility in foreign currency which can erode margins.